When a Price Tag becomes a Price Trap

This is the first post by guest blogger Prasad Narasimhan, our Managing Partner for Asia who’s based in Bangalore. More on Prasad here:

The Tata Nano was touted as the little BIG thing in the international auto market. At the India Auto Expo in Jan 2008, there was a kilometer long queue to take the first look. ‘Would it look like a car at all?’ was the question on everyone’s mind. The overwhelming consensus was it was a ‘really cute’, ‘good-looking’, ‘complete’ car. The little car was the big star! As bookings opened in May’09, Tata got 203,000 fully paid bookings generating $580m cash. Things were expected to grow exponentially from that base. However by Nov 2010, Nano was selling only 500 cars a month. This is in a market where the market leader, Suzuki sells 65000 units of entry-level cars priced over $5,000. What went wrong?

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While much of the blame has been pointed at problems in setting up a factory leading to very delayed supplies, there seem to be more fundamental issues relating to marketing to the bottom of the pyramid. Price was the only differentiator. While this contributed hugely to the initial buzz, it resulted in several un-intended consequences.

1.     The ‘cheap’ car became a cheapo’s car. It reduced the perceived status of the buyers in a category where the primary motive for moving into a car from a two-wheeler was a move up on status. Hence, while the intended target group (TG) was cautiously watching from the sidelines, curious to know whether they can put their hard earned money on the Nano, the actual buyers were affluent families who were picking up their second or third cars for infrequent users at home – mainly retired elders, and housewives. Only 20% of the initial bookings were for the basic version. This should have been a warning sign that the actual buyers were not the intended TG.

2.     The price tag became a price trap. The price tag of 1 lakh ($2300) was announced years before the car was launched. Consumers were expecting a car that retailed at that price. But in spite of breakthrough value engineering, Tata could never sell even the basic version for this price. And for ‘mandatory’ accessories like air-conditioning, the pricing inched up and up. And with every escalation in raw material prices, Nano was not even able to live up to the original price. The current retail price varies from $3100 for the basic version going all the way up to $4600 for the loaded one.

3.     Half the price led to Half the Quality? The common sight of a family of four precariously perched on a two-wheeler inspired Tata’s vision to move them to the safety of four wheels. While the Nano was meant to be a safer option for the two wheeler riders, it failed to live up to basic expectations from a car on safety. The car is small, has poor pickup and feels plasticky. And to add fire to this, some Nanos caught fire in highly publicized incidents. And the opinion was out on the street – Nano was cheap, low quality and unsafe.

4.     Focus on price closed the door on any other possible differentiators. Small could have been a virtue in India where road spaces are narrow and crowded. Beetle & Mini are two icons that could have inspired possibilities. Brands like REVA have built desire and likeability by taking a high ground on ecological consciousness. But choosing to major on price meant that other possibilities could not be explored.

The Nano fiasco is a timely warning for brands that want to target the bottom of the pyramid by using low price as a penetration tool. Marketers tend to assume that there is a large un-tapped market down there just waiting for lower priced products. But, people are not buying. Brands that have used price as the key reason to buy have repeatedly bitten the dust. Does anyone remember the short-lived history of low cost TVs in India? Sansui, Akai, Aiwa are long dead and gone. ITC failed several times in its attempt to woo ‘beedi’ smokers through cheaper and smaller cigarettes.

On the other hand, brands that have offered relevant value driven by deep consumer insight have expanded the bottom of the pyramid. Nokia’s ‘made for India’ durable phones led India’s cell phone revolution. These offered very relevant features like a torchlight (in rural areas where power was a constant problem), rubberized keypads for the humid climes, multiple address books to cater to multiple users, and language options to cater to the vast linguistic diversity of India. Dell’s offer of customization that enabled a just-right option led it to market leadership as the market for laptops exploded. Shampoo brands promoted usage on special occasions with low priced sachet packs. Times of India expanded readership by offering a world-class newspaper at Re.1.

The interesting paradox in middle India is that people are still OK with delayed gratification (although this is changing). They have big hopes but are willing to bide their time. They live in hope, but are not dying of despair. They are value maximizers, and squeeze value out of the brands they choose. But first, they need to be excited. As the saying goes, “you can’t sell poverty to a poor person”.

Tata Nano is currently offering low interest finance options and going in for a distribution drive to revive sales. A new multi-creative TVC is on air, with stories building on how safe, how private or how complete the car is. Without addressing more basic issues, the original dream seems more distant by the day.